It’s a morbid but common concern: what happens to your credit card debt when you die? If we consider that the average credit card balance per person in the United States is $6,365 in 2023, the likelihood of someone unexpectedly dying and leaving an unpaid credit card balance is significant.
What happens to your credit card debt and other outstanding amounts depends on various variables, including where you live, the value of your estate, and whether your partner was a joint account holder on the card.
A common misconception is that death always leads to debt forgiveness, but that is not the case. With some forms of debt, such as federal and student loans, the debt is terminated if the borrower passes away. But this is an exception, not the rule.
Credit card debt does not disappear when the cardholder dies and must be paid from the estate left behind, meaning your loved ones may receive a reduced inheritance—or no inheritance at all.Who is responsible for paying the debt?
If you pass away and have outstanding credit card debt, it will be paid from your estate—a term that refers to your individual assets, including any property you own, bank accounts, or other valuables you have accumulated during your life.
When you die, your estate typically goes into probate, a legal process that deals with the transfer of your assets. It ensures that all your debts and taxes are paid before issuing the remaining funds to family and friends.
In most cases, the executor—the person listed in the will, if there is one, as responsible for carrying out the deceased’s wishes—is responsible for settling any outstanding debts of the estate. If there is no will, the court may appoint an administrator or personal representative to handle the matter.
Typically, your relatives or friends do not have to pay your credit card debt with their own money. However, there are some exceptions:
• You were married and live in a community property state: In community property states, the surviving spouse is responsible for paying the credit card debt incurred by the partner. As of 2023, community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
• You had a joint credit card: If you have a joint credit card shared with a partner or relative, the joint user is responsible for the total outstanding balance. Notably, only joint users are responsible for repaying the credit card debt; if your partner is an authorized user, they will not be legally responsible for the debt.
Family members are rarely responsible for a loved one’s credit card debt. If the debt collector claims that you owe money, request a debt validation letter showing that you are not legally responsible for it.The impact of credit card debt on your estate
When you pass away, your estate will need to pay any outstanding debts, including credit card debts. Debts are paid in a specific order; generally, unsecured debts, such as credit card balances, have the lowest priority and are repaid last. If the value of the estate runs out before all debts are paid, it is considered insolvent, and credit cards may not be paid.
While most estate assets are used to pay debts, there are some accounts that are exempt:
• Retirement accounts: If you have money in a 401(k) or an individual retirement account (IRA) and have a designated beneficiary, the money in the account will pass to the beneficiary after your death. As a result, the value of that account is exempt from repaying debts, as it no longer belongs to you or your estate.
• Life insurance death benefits: Since life insurance death benefits are paid to your beneficiary, they are also exempt from debt repayment. If you pass away with an active life insurance policy, your beneficiaries will receive the full amount of the death benefit; any credit card debt you have will not reduce the amount paid.
No one wants to think about their own death, but knowing what happens to your debts after you’re gone can help you plan for the future. If you are concerned about leaving debts behind, obtaining a life insurance policy large enough to cover your debts may be a way to protect your loved ones.Source: Yahoo Finance